Big-Yielding Fertilizer Stock Is the Perfect Drought-Buster

by Bryan Perry | August 22, 2012 11:47 am

The drought is hitting consumers and businesses hard[1]. Grain prices are at all-time highs, with corn over $8 per bushel, and big names in food like ConAgra (NYSE:CAG[2]) and Tyson Foods (NYSE:TSN[3]) are hurting from the costs.

And with Warren Buffett cutting his stake[4] in Procter & Gamble (NYSE:PG[5]), things aren’t looking bullish for companies that could pass these higher prices on to consumers.

In this backdrop, fertilizer stocks are good buys because there is an increased demand for grains and thus an increased demand for agricultural chemicals that boost crop yields. And if you want some of the best fertilizer investments on Wall Street, I recommend master limited partnerships (MLPs) — specifically, Rentech Nitrogen Partners LP (NYSE:RNF[6]).

MLPs have the blessing of both the Congress and the Obama administration via special tax breaks. And it’s important that they do, because these are capital-intensive businesses. In exchange for special status with the IRS, these companies must deliver the vast majority of their profits back to shareholders in the form of gigantic dividend-like payouts called distributions. (Read more about the specifics of MLPs here.[7])

Rentech Nitrogen Partners is one of my favorite MLPs in the agricultural sector. It’s a leading fertilizer business based in East Dubuque, Ill., situated right in the mid-Corn Belt of America — adjacent to Wisconsin and Iowa — the largest market in the United States for direct application of nitrogen fertilizer products.

The company sells virtually all of its production within a 200-mile radius of where it’s manufactured, which allows the company to sell nitrogen fertilizer into higher-priced agricultural markets, realizing higher average net sales prices per ton of ammonia than other publicly traded competitors.

RNF admittedly has a short track record producing income for investors, with only two total distributions. But at $33 a share and payments of $1.06 in May and and $1.17 in August, you get an annualized yield of roughly 13.5% based on an estimated $4.50 or so annually.

And with demand surging while the feedstock used to produce corn fertilizer — namely petro-coke and natural gas — remains very cheap, you can expect gigantic profit margins and a good chance of increased distributions going forward, too.